The Packers and Stockyards Act was passed in 1921 and established broad prohibitions on the actions of meat supply chain entities subject to its jurisdiction, mostly meat packers. Some market participants believe the broad provisions of the act make enforcement difficult and create uncertainties regarding compliance. Title XI of the Food, Conservation and Energy Act of 2008 (known as the 2008 farm bill) created additional requirements for packers and other buyers in livestock and poultry supply chains and directed the Secretary of Agriculture to establish criteria to use when determining whether the Packers and Stockyards Act has been violated. On June 22 the Grain Inspection, Packers and Stockyards Administration (GIPSA) of USDA released a proposed rule to implement the language in the 2008 farm bill. The rule will be open to public comment until November 22, 2010.
The subject of most interest to those involved in export markets is “alternative marketing arrangements” that use some pricing method other than selling market weight animals in a visible open market. Many of these arrangements rely on price discovery through spot markets as reported by the Agricultural Marketing Service of USDA. Producers are provided premiums for achieving meat trait standards and proponents of these arrangements are concerned these will be restricted under the proposed rule. Supporters of the proposed rule say that premiums can be offered, but buyers must maintain records documenting their justification.
The goal of alternative marketing arrangements is to more accurately send price signals for preferred meat traits from consumers to producers. The usual signal is a price premium for targeted meat traits, but it can be discounts for animals that fail to meet the standard. The marketing arrangements seek to send the correct signal to producers while also achieving consistency of throughput for meat processing plants to manage costs and meeting food safety demands of regulators and consumers. A meat product that meets consumer demands, produced at low cost and consistent with food safety standards is a “triple win” for any supply chain.
A recent analysis by the Economic Research Service of USDA, Japan’s Beef Market, reports that beef consumers in Japan have the same three goals. Consumers are price sensitive and U.S. beef has to compete with Japanese and Australian beef for market share. Lower beef prices can also expand the size of the beef market with certain low-priced U.S. products perceived as particularly good values. Demand for some products in Japan has resulted in higher prices for U.S. processors and cattle producers than could be gained in the U.S. market alone. Japanese tastes for meat differ from those in the U.S. and consumers reward companies that can meet those needs. Consumers have preferred heavily marbled beef, but that appears to be changing some for health reasons. Japan had a series of disease and health safety issues beginning with E. coli outbreaks in 1996 and the discovery of BSE in Japan in 2001 followed by the U.S. in 2003. Food safety in Japan is a concern for all meat products. All meat is required to carry a country-of-origin label and some stores provide for domestic beef a picture of the farmer or farm where the animal was raised.
In calendar year 2009, U.S. exports on a carcass weight basis were 17.8 percent of U.S. pork production and 7.4 percent of U.S. beef production. Japan was the number one U.S. market for fresh, chilled and frozen pork and beef at $1.98 billion. After NAFTA partners Mexico and Canada, South Korea was the number four market at $420 million. That market is similar to the Japanese market with cost-conscious consumers, particular meat preferences and concerns about food safety in a market with high-priced domestic supplies and competing importers. The fifth largest market for U.S. fresh, chilled and frozen pork and beef, Hong Kong, at $389 million is a similar market as is Taiwan, the seventh largest market at $206 million. Smaller markets like the EU at $139 million are equally discriminating in consumer demands. Export market issues are not going away in the years ahead. USDA’s ten-year projections released in February 2010 showed beef exports 60 percent higher in 2019 than in 2009 and pork exports up by 31 percent.
Changing government regulations adds uncertainty to supply chain relationships. While adjusting to new regulations can and will be done, it will add to the cost of doing business. While costs are always an issue, consumer tastes and preferences for certain types of meat and consumer concerns about food safety may have greater consequences. Alternative marketing arrangements provide greater returns for those animals that result in meat products that match consumer demands. Any actions that disrupt that information flow are negatives for an entire supply chain. Also, supply chains will increasingly be relied upon to trace meat flows to help resolve food safety issues. Closer coordination in supply chains will ease that process.
The proposed rule does not address the ownership of cattle and hogs by packer during part or all of their production cycle. Direct ownership is one way to align the supply chain to meet consumer demands. Today about 25 percent of the hogs and 5 percent of the cattle are owned by packers and there appears to be no interest in having government regulations cause an increase in those percentages.
Consumers of beef and pork in Tokyo, Seoul and Hong Kong are unaware that a GIPSA proposal exists that could change the meat products available from the U.S. They have already made their concerns known in the market place about price competitiveness, tastes and preferences and food safety. They will be heard from again if the new rules influence supply chain activities. Writers of the final rule must to be attuned to those concerns because loss of export markets would result in lower incomes for livestock producers.